Mumbai: The Reserve Bank of India (RBI) on Wednesday kept borrowing costs at a record-low for the ninth consecutive time as it decided to continue supporting economic growth amid uncertainty over the impact of the Omicron strain of the coronavirus on the economy.
The six-member Monetary Policy Committee (MPC), which has paused rate changes since August last year, unanimously decided to keep the benchmark repurchase rate at 4 per cent and voted 5-1 to retain its accommodative policy stance as long as is necessary, reflecting a continued bias to support economic growth given that inflation was not a big worry.
The reverse repo rate — the level at which it absorbs excess cash from lenders — was kept unchanged at 3.35 per cent.
It kept the GDP growth projections unchanged at 9.5 per cent for the current fiscal and retained the inflation forecast of 5.3 per cent for the full year.
While the Indian economy has literally hauled itself out of one of the deepest contractions in April-June, it is not yet strong enough to be self-sustaining and durable.
“Given the slack in the economy and the ongoing catching-up of activity, especially of private consumption, which is still below its pre-pandemic levels, continued policy support is warranted for a durable and broad-based recovery,” Governor Shaktikanta Das said. “Our motto is to ensure soft landing that is well-timed.”
There, however, has been no guidance on the rate trajectory.
The RBI had slashed the repo rate by a total of 115 basis points (bps) since March 2020 to soften the blow from the coronavirus pandemic and tough containment measures. This is on top of rate cuts to the tune of 135 bps since the beginning of 2019.
The central bank struck to its principle of ‘gradualism’ since the downside risks to a durable growth trajectory have clearly increased due to the spread of the new COVID variant Omicron.
On inflation, the central bank took comfort from the excise tax cuts in petrol and diesel, and the steps taken by the government to moderate prices in food categories such as edible oil and pulses.
Das said the central bank will continue rebalancing liquidity conditions and will use VRRR (Variable Rate Reverse Repo) auction as the primary tool for liquidity management, shifting away from the fixed reserve repo rate.
The RBI will raise the amount of cash it absorbs through the 14-day VRRR to Rs 6.5 lakh crore on December 17 and subsequently to Rs 7.5 lakh crore on December 31. At the same time, the auctions will have a higher proportion of 28 days vis-a-vis the primary tenor of 14 days. Excess cash in the banking system hovered at around Rs 9.2 lakh crore, close to a record high.
The surplus liquidity is seen as a risk to consumer prices, already under pressure from a rise in vegetables and fuel costs.
More steps are being taken to normalise the excess liquidity by reducing the additional quantum that was eligible under Marginal Standing Facility (MSF). Further, banks have been permitted to prepay any of their Targeted Long Term Repo Operations (TLTROs) withdrawals to optimise their liquidity position.
“The MPC regarded the accentuation of headwinds emanating from global developments as the main risk to the domestic outlook, which is now somewhat clouded by the omicron variant of the COVID-19,” he said.
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